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Thanks to the booming economy and shrinking unemployment, Germany's deficit for 2012 will likely be much lower than initially feared, sinking to €31.5 billion, according to government sources.

Finance Minister Wolfgang Schäuble had previously allowed for new borrowing of €40.1 billion, but new medium-term plans to be reviewed by Chancellor Angela Merkel's cabinet on Wednesday reflect the lower number, the sources said on Monday.

The new budget for the next four years also plans to reduce net borrowing to €22.3 billion instead of €31.6 billion in 2013. One year later, the budget gap will be at €15.3 billion – as opposed to €24.1 billion in the previous plan. In 2015, the deficit is set to be at €13.3 billion.

Meanwhile Defence Ministry spending will reportedly see smaller budget cuts than expected. New Defence Minister Thomas de Maizière won't be required to cut costs there by €8.3 billion until 2015. That would give him an extra year to push through wide-ranging reforms than what was previously allotted for his predecessor, Karl-Theodor zu Guttenberg, who resigned recently after a scandal over his plagiarized doctoral thesis.

The Health Ministry will likely get a boost of some €700 million in 2015 to fund statutory health insurance to subsidize payments from low-income recipients.